Using All Four Financial Statements

Easy Practice Test

Introduction to Accounting

Easy Practice Test

Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.

1. Which of the following is reported in the operating section of the direct method cash flow statement?

a. cash paid to purchase land
b. cash paid to repay long-term debt
c. cash paid for rent
d. cash paid for dividends
Answer
C. The operating section reports cash paid for major operating expenses. Rent is an operating expense. Cash paid for land is reported in the investing section (long-term assets.) Long-term debt and dividends is reported in the financing section (long-term liabilities and owners.)

2. Which of the following is reported in the operating section of the indirect method cash flow statement?

a. cash received from customers
b. cash received from selling equipment
c. depreciation expense
d. cash paid and cash received from operations
Answer
C. The indirect method begins with net income and reconciles to total cash from operations. It does not separately report cash paid and cash received. Depreciation expense is a noncash expense that is one of the reconciling items between net income and cash.

3. The purchase of property, plant, and equipment for cash of $100,000 is reported in which section of the cash flow statement?

a. operating section
b. investing section
c. financing section
d. both the investing and financing section
Answer
B. Cash related to buying and selling long-term assets is reported in the investing section.

4. The cash flow statement reports

a. cumulative net income
b. the items that cause the cumulative change in cash
c. the cumulative balances of all items impacted by cash
d. the items that cause the change in cash for the period
Answer
D. The cash flow statement is for a period of time only. The cash flow statement does not report cumulative amounts.

5. Which financial statement answers the question “how much is owed” on long-term debt as of a certain date?

a. cash flow statement
b. balance sheet
c. income statement
d. both the balance sheet and the cash flow statement
Answer
B. The balance sheet is the only statement that reports the amount owed to date. The cash flow statement reports cash received for additional debt and cash paid to reduce debt; however, it does not report the balance owed as of a certain date.

6. Which financial statement answers the question “how much cash” during the period?

a. cash flow statement
b. balance sheet
c. income statement
d. both the cash flow statement and the income statement
Answer
A. The cash flow statement is the only statement that reports the cash during the period. The balance sheet reports the cumulative amount of cash as of a certain date. The income statement reports “what happens” regardless of whether cash was paid or received.

7. Which financial statement answers the question “how much value was provided to customers” during the current period?

a. cash flow statement
b. balance sheet
c. income statement
d. both the cash flow statement and the income statement
Answer
C. The income statement reports value provided to customers (sales or revenue) during the current period. The direct method cash flow statement reports cash collected from customers; however, the cash collected could be from previous periods, the current period, or future period sales.

8. Which financial statement answers the question “what was done with owners” during the period?

a. cash flow statement
b. statement of owner’s equity
c. income statement
d. both the cash flow statement and statement of owner’s equity
Answer
D. Both the cash flow statement and the statement of owner’s equity report transactions with owners. The statement of owner’s equity reports changes to the owner’s equity accounts from each transaction and the cash flow statement reports the cash paid or received associated with transactions with owners.

9. Which financial statement answers the question “ how much does the company have” to date?

a. cash flow statement
b. balance sheet
c. statement of owner’s equity
d. both the balance sheet and statement of cash flows
Answer
B. The balance sheet is the only statement that reports “to date” amounts.

10. Which statement reports the change in accounts receivable from one period to the next?

a. cash flow statement
b. balance sheet
c. statement of owner’s equity
d. both the balance sheet and statement of cash flows
Answer
A. The indirect method cash flow statement reports the reconciling items between net income and cash and the change in current assets and current liabilities are reconciling items. Accounts receivable is a current asset. The balance sheet reports the cumulative amount only and does not report the amount of the change or what caused the change to an account.

11. State two items that would be reported on each of the three sections on the cash flow statement

a. Operating activities
b. Investing activities
c. Financing activities
Answer

Any of the following are correct:

a. Cash from customers, cash paid to suppliers, cash paid for any other expenses, cash received from earnings on investments, a change to a current asset or current liability

b. cash used to purchase or cash received from selling long term assets (property, plant, equipment, intangible assets, L/T notes receivable or L/T investments)

c. cash received from borrowing a long-term liability or cash used to repay all long-term liabilities. Cash received from or paid to shareholders (owners.)

12. Prepare a statement of retained earnings from the following information:

(shows the changes in only the retained earnings account)

 

a. the company earned $325,000 from all prior year’s operations
b the company paid $32,000 to shareholders in all prior years
c. the company incurred a net loss for this period of $12,000
d. the company paid out $5,000 in dividends to shareholders this year
e. the company provided $124,000 of goods to customers this year
f. the company received $23,000 in dividends from investments this year

Answer

The statement of retained earnings shows the changes in retained earnings;
net income or loss (profit or loss) and dividends paid.

Providing goods to customers is a revenue which is already included in the profit or loss for this period.

Receiving dividends is investment revenue which is already included in the profit or loss for this period.

Beginning Retained Earnings
(325,000 – 32,000)
$ 293,000
– Less Net Loss
this period only
($12,000)
– Dividends Paid
this period only
( $5,000)
= Ending Retained Earnings $ 276,000

13. Prepare a Statement of Stockholder’s Equity for the year ended
December 31, 20×2 using the following information:

Occurred during 20×2:

a. dividends declared to shareholders $   5,000
b. dividends paid to shareholders $   4,000
c. net income this period $   22,000
d. issued 20,000 shares; $0.10 par value $100,000
e. provided goods to customers this period $275,000
f. purchased common stock from investors $  12,000

Balance Sheet as of December 31, 20×1

Common Stock (10,000 shares issued; $0.10 par) $     1,000
Paid In Capital $199,000
Treasury Stock ($   25,000)
Retained Earnings $   26,000
         Total Stockholder’s Equity $201,000

Answer
Common
   Shares  
Stock
   $
Paid In
Capital
Treasury
   Stock   
Retained
Earnings
Balance, December 31, 20×1 10,000 $1,000 $199,000 ($25,000) $26,000
Issued Common Stock 20,000 $2,000 $98,000
Dividends Declared ($5,000)
Net Income $22,000
Purchased Common Stock ($12,000)
Balance, December 31, 20×2 30,000 $3,000 $297,000 ($37,000) $43,000

Important to notice:

Dividends paid is reported on the cash flow statement. Dividends declared is reported on the statement of stockholder’s equity. The difference in the two is dividends payable; reported on the balance sheet.

Goods provided to customers is revenue which is already included in net income

14. Prepare a Statement of Cash Flows using the information provided below.
The company uses the indirect method for the operating section.

 

Cash proceeds from selling equipment $35,000
Cash paid for interest expense $ 4,000
Net Income $48,000
Decrease in accounts payable (negative #) $ 7,000
Depreciation expense (positive #) $18,000
Cash paid to reduce long-term debt $25,000
Cash paid for salaries $23,000
Gain on sale of equipment (negative #) $ 3,000
Decrease in accounts receivable (positive #) $ 6,000
Cash received from customers $65,000
Cash received from issuing common stock $10,000
Cash paid to purchase computers $ 5,000
Answer

Indirect Method

Net Income $48,000
      Depreciation expense $18,000
      Gain on sale of equipment ($ 3,000)
Change in current assets and current liabilities:
      Decrease in accounts payable ($ 7,000)
      Decrease in accounts receivable $ 6,000
            Cash from operating activities: $62,000
Cash paid to purchase computers ($ 5,000)
Cash proceeds from selling equipment $35,000
            Cash from investing activities: $30,000
Cash paid to reduce long-term debt ($25,000)
Cash received from issuing common stock $10,000
            Cash from financing activities: ($15,000)
Total Change in Cash $77,000